Business Models as an Unit of Analysis forStrategizing

1. Draft (30. Sep. 02)Dr. oec. Patrick StählerLindenbachstrasse 52CH-8006 ZürichPatrick.Staehler@alumni.unisg.ch

The Rise of the Business Model to Prominence

In the 1990s with the advent of IT-centered businesses the term

Business Model

rose to prominence.

The rise of the term is closely related to the emergence anddiffusion of commercial activities on the internet. Internet start-ups used theterm to differentiate themselves from the incumbents and to explain theircompetitive position.The term appeared first in 1970s in computer science journals, after 1995 also inpopular business and computer magazines like

Business Week

Wired

before itgained access into peer-reviewed journals focusing on the emerging field of e-commerce and e-business (cp. Timmers 1998; Kotha 1998). Today the term isfrequently used also in other management journals like Harvard Business Review(cp. Porter 2001; Magaretta 2002).In business as well as in academia the term is largely sloppily used, seldomdefined, meaning very different things and often confused with "strategy". Peopleuse the terms "strategy" and "business model" interchangeably to refer toeverything they believe gives them a competitive advantage. Typical headlines inthe business press are

Killer Business Models

(Goldberg 2000) or

Battle of theNew Business Models

(Stahl 2000).The aim of this paper is to bring clarity to the term business model and itsrelationship to strategy.

Business Models as a Unit of Analysis

In strategic management the classical unit of research are the

business unit

, the

industry

in which a business unit is competing and the

corporation

which is thelegal entity of most business units (Bettis 1998: 357). On the basis of these units

This paper is based on Stähler (2001).

cp. Stähler (2001:pp. 37-40) for a brief history on the diffusion of the term Businessmodel in academic journals.

Erreur ! Style non défini.

of analysis researchers try to evaluate why certain companies have higher profitsthan other, comparable companies.Proponents of the market-based view the decisive unit of analyses to be theindustry in with a corporation is active (cp. Mason 1939; Bain 1956; Bain 1968;Caves & Porter 1977; Porter 1980). They argue that the structure of the industryis crucial for higher profits. Companies can decide (i) in which industry they wantto operate (ii) what position they want to have in that industry and (iii) they canchange the structure of the industry to obtain a more favorable industrystructure e.g. by creating barriers of entry for newcomers. An industry is definedas a group of companies that produce goods or services that act as substitutesfor each other.As a reaction to this external view of competitive advantages, other researcherstried to explain the higher profitability of certain corporations from within thefirms. Better, scare internal resources are seen as the crucial factor for higherprofitability (cp. Wernerfelt 1984; Barney 1986; Prahalad & Hamel 1990; Barney1991).

2.1

Criticism of the Usual Suspects

The traditional units of analysis have almost got the status of axioms forresearch in business administration and economics. They determine whatresearch questions are being asked and what research methods are being used.Seldom they are scrutinized.

Table 1: Strategic Management: traditional units of analysis

Unit in competition

•

The business unit is the primary focus of competition and the strategy within an industryUnit of environmental analysis

•

The industry as business units that supply substitutesUnit of organization

•

The corporation defined as the border between internal organization and the external market. Theborder is drawn by minimizing transaction costs for coordinating all economic activities

Source: (cp. Bettis 1998: 358)

Since the mid 1990s due to increasing rate of innovation and the faster diffusionof technology researchers in strategic management talk about a new competitivelandscape (Bettis & Hitt 1995). Part of this new competition is the increasingunpredictability and the vagueness what an industry actually is.Bettis (1998: 359) phrases carefully, that the traditional units of analysis "maybe largely out of touch with the evolution of modern competition in a technology-driven, global world that has seen a huge and rapid level of change." "The newcompetitive landscape is currently being shaped. Thus, no definitive view of thelandscape is possible. It may be several years or decades before an accuratepicture can be developed." (Bettis & Hitt 1995: 8).

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A number of researchers have proposed alternative units of analysis. Gulati et al.(2000) call

strategic networks

like strategic alliances, joint-ventures or long-termsupplier relationships as a potential source of higher profitability. Selz (1999)proposes

value webs

to explain commercial activities on the internet. For Dyerand Singh (1998) the

relationships a firm

has inside its network of surroundingfirms are a source of competitive advantages. Klein (1996) takes

inter-organizational-systems

as his unit of analysis. Brandenburger and Nalebuff (1997) introduce the concept of a

value net

, in which a firm operates. The valuenet comprises of customers, suppliers, competitors, and also of complementors.A complementor is "[a] player … if customers value your product more whenthey have the other player's product than when they have your product alone"(Brandenburger & Nalebuff 1997: 18).The strategic network perspective is suited for the analysis of the newcommercial activities we find on the internet but it is too narrow to capture allvalue creation. B2B applications can be well explained but not the creation of new products which use the new idiosyncrasies of the new medium. Informationand communication technology (ICT) enables new value creation and newconfiguration of values chains to satisfy customer needs (Schmid 2000). Of importance is also to include the customers in the new unit of analysis sincevalue can be created for customers by other customers.

2.2

The Business as the Locus of Innovation

ICT as a general purpose technology changes fundamentally the way value iscreated for customers. ICT does not only allow an increase of efficiency of existing industries but also creates new or different business that have little incommon with traditional economic activities. So the traditional units of analysisare too broad to capture the changes occurring since the very fundamentals of value creation are being changed by ICT. A business is the fundamental of anyvalue creation and therefore the business should be the unit of analysis for anyfundamental change in value creation. The more aggregated units of analysis likethe industry or the business unit are well suited as soon as the fundamentals of abusiness are understood. But to gain the understanding one has to investigatefirst what a business is.Interestingly, very seldom the term business is being defined. Even Porter(1985: 58) does not define a business. He defines only a business unit. He givesadvise how to optimally segment a corporation into business units but does notwrite about what a business is. In this seminal work he mentioned several keyparts of a business like the value chain, the customers, the suppliers and thecompetitors but other parts like the source of revenue he mentions only on thesideline. His focus is on the industry and how a company can obtain superiorprofits by finding a profitable and defendable position in that industry.